A floating rate mortgage loan is made for $130,000 for a 30-year period at an initial rate of 12 percent interest. However, the borrower and lender have negotiated a monthly payment of $1,040.

Required:

a. What will be the loan balance at the end of year 1?

b. If the interest rate increases to 13 percent at the end of year 2, how much is the payment plus negative amortization in year 1 and year 5 if the payment remains at $1,040?